Weekly Market Wrap | 19 August 2023

In this Weekly commentary, we will recap

China’s property market turmoil and possible policy actions 

China’s real estate market, once the emblem of robust growth, is currently facing notable challenges. Country Garden, a leading property developer in China, recently reported significant financial loss and missed bond payments, sparking industry-wide concerns.

What caused the Property Sector’s Decline

While many intricate factors are at play, a few primary reasons include:

• Demographic Shift: The fertility rate in China decreased to a record low of 1.09 in 2022. This trend indicates a reduced future demand for housing as the population growth slows.
• Heavy Reliance on the Real Estate: Since China’s market reforms began in the 1980s, its real estate market has been instrumental in driving the nation’s economic growth. To this day, the property sector remains a dominant economic pillar, accounting for over 20% of the GDP.
• Regulatory Adjustments: Towards the end of 2020, the Chinese government decided to tighten the reins to reduce leverage in the property sector, leading to liquidity constraints for many developers.
• COVID’s Ripple Effects: The pandemic’s economic impact has not done the property sector any favors, as people are becoming more cautious about spending.   

The convergence of these factors has dealt significant blows to the industry

Market Reactions So Far 

Following the headline news, equity markets experienced volatility with foreign investors showing caution. Notably, the credit market reacted more calmly. The impact has largely been confined to property high-yield bonds, with minimal spillover to other sectors.

Potential Policy Interventions

It’s important to note that these problems, while significant, are not impossible to overcome. The Chinese government has a track record of successfully handling economic crises in the past.  We are likely to see more policy support. 

Continued monetary policy easing: We are likely to see broader monetary easing measures, including interest rate cuts and reductions in the reserve requirement ratio (RRR), to stabilize the economy.

Targeted Stimulus Measures on housing market: A recent important official statement omitted the familiar phrase, “houses are for living in, not for speculating.” This suggests Beijing might be considering new supportive measures for the housing market. While no major announcements have been made, we believe these measures could soon be introduced in various cities. Potential strategies might encompass reducing mortgage rates, relaxing home buying restrictions, and extending more loans to both property developers and consumers.

State-Funded Bailouts: While Beijing has traditionally avoided such measures, considering the size and importance of the real estate sector, state-funded bailouts or support for key players might be possible.

Takeaways from Minutes of the July FOMC 

The Fed released the minutes of the FOMC meeting in July. These are a few interesting takeaways from the meeting minutes: 

• Divided opinions within the committee. Some members were concerned that inflation would fail to recede and more hikes may be needed. But “a couple” members wanted to continue to pause
• Expect slower growth.  Although the minutes removed the recession forecast, FOMC members expect slower growth in the next two years.  
• Data dependent Future sessions will depend a lot on incoming data, as Powell stressed in press conference. The challenge is to find a balance between not tightening enough and tightening too much. 

In summary, neither the Committee nor the staff have a definitive forecast for the immediate future. Much like everyone else, they’ll be awaiting further data. Given that core inflation is displaying signs of deceleration, the prevailing consensus suggests the Fed will likely maintain its current stance in the upcoming September meeting.

Sea Limited Crashed After Earnings Report

Sea Limited, a home-grown tech company in Singapore, reported its second-quarter earnings on August 17, 2023. The company missed analysts’ expectations and saw its stock price plunge by 29%. 

For Q2FY2023 ending June 30, Sea Limited registered a net income of US$331.0 million ($449.19 million). This marks its third consecutive quarter of net profit, showing a significant 135.5% y-o-y jump. For context, this is in sharp contrast to the net loss of US$931.2 million they reported in the same quarter the previous year.

What is the concern of investors? 

The primary concern revolves around the company’s shift in focus from profit to growth. Forrest Li, Sea’s chairman and group CEO, highlighted this new direction, stating, “We have started, and will continue, to ramp up our investments in growing the e-commerce business across our markets. Such investments will have impact on our bottom-line and may result in losses for Shopee and our group as a whole in certain periods.” 

Should you invest? 

Sea’s current approach to ramping up e-commerce investments may put short-term pressure on its earnings and share value; this could particularly be felt in 2H23, a period that tends to have heavy promotional investments. The exact sum Sea is earmarking for investment and the anticipated returns on these ventures are expected to come into sharper focus by 2024.

Yet, it’s essential to see the bigger picture. Sea Limited remains a dominant player in one of the world’s rapidly expanding markets. With digitalization and consumption trends soaring, especially post-pandemic, the company is poised for growth. Therefore, for investors with a stomach for some short-term volatility and a vision for long-term gains, Sea Limited could present an attractive proposition.

Source: Google Finance, Bloomberg, Yahoo Finance, CNBC, Financial Times, Reuters, Business Times, CNN, Fashion United